RBI Accepts KV Kamath Recommendations

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Reserve Bank of India (RBI) has formed a five member committee under the chairmanship of former ICICI Bank CEO KV Kamath.
Other members of the committee are-
Diwakar Gupta,
TN Manoharan,
Ashvin Parekh,
Sunil Mehta.
More members may be added to the committee if required, RBI said.

Role of committee?

The committee, which has been constituted by the RBI will make recommendations on-
The required financial parameters to be factored into the resolution plans
(with sector specific benchmark ranges for such parameters),
Will submit its recommendations to the RBI.
A resolution plan is a proposal that aims to provide
A resolution to the problem of the corporate debtor’s insolvency and its consequent inability to pay off debts.
The committee submitted its report to RBI on 4 September, and
Its recommendations have been broadly accepted.

The committee has made recommendations for 26 sectors that could be factored by lending institutions while finalizing loan resolution plans.

In its report, the five-member panel led by K.V. Kamath identified five financial parameters to gauge the health of sectors facing difficulties.
Total outside liabilities to adjusted tangible networth,
Total debt to earnings before interest, taxes, depreciation, and amortization (Ebitda),
Current ratio,
Debt service coverage ratio (DSCR),
Average debt service coverage ratio (ADSCR).

The central bank has allowed greater leeway to the real estate sector with the highest debt to Ebitda ratio permissible among the 26 sectors it has identified.
The central bank said lenders are free to consider other financial parameters as well,
While finalizing the resolution assumptions apart from the mandatory key ratios and the sector-specific thresholds that have been prescribed.

The restructuring quantum from the corporate sector in FY21 could range between 3 per cent and 5.8 per cent of the banking credit, amounting to Rs 3.3-6.3 trillion.
At least Rs 210,000 crore (1.9 per cent of banking credit) of non-corporate loans is likely to undergo restructuring.
These loans would have otherwise slipped into the non-performing asset category.

It will improve the transparency of the loan restructuring process that the Indian banking system is about to undertake.
While the financial parameters suggested by the panel are reasonable, some borrowers may not be able to meet the granular requirements prescribed by the committee, resulting in a spike in bad loans.